TTM Technologies, Inc. - 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended June 28, 2004, and the two quarters ended June 28, 2004, compared to the same periods in 2003. TTM Technologies, Inc. is a provider of time-critical and technologically complex multilayer printed circuit boards (PCBs) serving high-end commercial markets including networking, high-end computing, and industrial/medical sectors. The company operates three facilities in the United States (Santa Ana, CA; Chippewa Falls, WI; Redmond, WA).
Key Financial Metrics
| Metric (in thousands) | Q2 2004 | Q2 2003 | YTD 2004 | YTD 2003 |
|---|---|---|---|---|
| Net Sales | $61,595 | $41,047 | $119,291 | $80,681 |
| Gross Profit | $19,076 | $6,446 | $36,356 | $10,972 |
| Gross Margin | 31.0% | 15.7% | 30.5% | 13.6% |
| Operating Income | $10,990 | $735 | $21,421 | $(601) |
| Net Income | $6,910 | $432 | $13,436 | $282 |
| Diluted EPS | $0.17 | $0.01 | $0.32 | $0.01 |
| Cash & Equivalents | $34,035 | $24,237 | $34,035 | $18,879 |
| Operating Cash Flow (YTD) | $21,626 | $14,713 | $21,626 | $14,713 |
| Long-Term Debt | $2,222 | $3,333 | $2,222 | $3,333 |
Liquidity: As of June 28, 2004, the company held $34.0 million in cash and cash equivalents and $13.0 million in short-term investments. The company has a senior credit facility with a $25.0 million revolving commitment; as of the reporting date, there were no outstanding balances on the revolver, leaving $21.8 million in available borrowing capacity. The term loan balance was $6.7 million.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 50.1% in Q2 2004 compared to Q2 2003, driven by a 47% increase in pricing and a 53% increase in production volume. Pricing improvements were attributed to economic strengthening and a shift toward higher-technology products.
- Margin Expansion: Gross margin improved significantly from 15.7% to 31.0% in Q2 2004. This was due to higher prices, labor efficiencies, lower per-unit material costs, and better absorption of fixed manufacturing overhead.
- Profitability: The company transitioned from a net loss in the first two quarters of 2003 to a net income of $13.4 million in the first two quarters of 2004. Operating income for the YTD period turned from a loss of $0.6 million to a profit of $21.4 million.
- Restructuring: A restructuring charge of $0.9 million was recorded in Q2 2004 related to an asset impairment of a building held for sale in Burlington, Washington. This contrasts with a $0.2 million charge in the prior year period.
Guidance, Outlook, and Risks
Outlook and Expansion: Management has approved a plan to expand production capacity at the Chippewa Falls, Wisconsin facility by 85% in two phases. Phase one, costing approximately $10 million, is expected to be completed by the end of 2004. Phase two, costing approximately $4 million, is contingent on demand and market conditions. The 2004 capital plan is expected to total approximately $20 million.
Management Commentary: The company notes that the quick-turn percentage of orders decreased to 22% in Q2 2004 from 29% in Q2 2003, reflecting faster growth in standard lead-time production at Chippewa Falls. However, the absolute dollar value of quick-turn revenue increased.
Risks and Contingencies:
- Customer Concentration: The top 10 customers accounted for 68% of net sales in Q2 2004. The top five OEM customers accounted for 53% of sales. Loss of major customers poses a material risk.
- Competition: The company faces intense competition, particularly from Asian manufacturers with lower production costs. Competitors are increasingly capable of producing high-technology boards.
- Deferred Tax Assets: The company maintains a valuation allowance of approximately $18.2 million against deferred tax assets. Future profitability is required to realize these assets; otherwise, additional valuation allowances may be necessary.
- Legal Proceedings: The company is a defendant in a patent infringement lawsuit filed by the Lemelson Foundation. While a related Nevada court found the patents invalid, the plaintiff has the right to appeal.
Investor Verification Checklist
- Customer Concentration: Verify the stability of the top 10 customers, who represent 68% of sales, and the risk of order cancellations.
- Expansion Execution: Monitor the progress and capital expenditure burn rate of the Chippewa Falls facility expansion to ensure it aligns with demand forecasts.
- Margin Sustainability: Assess whether the 31% gross margin is sustainable given potential price competition from Asian manufacturers and raw material cost fluctuations.
- Deferred Tax Realization: Review future earnings projections to determine if the $18.2 million valuation allowance on deferred tax assets will be reduced or increased.
- Asset Sale: Track the closing of the Burlington, Washington building sale, expected in Q4 2004, to confirm the realization of the $1.575 million consideration.